Option Investor

Daily Newsletter, Monday, 1/11/2010

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Monday Delivers A Mixed Bag

by Todd Shriber

Click here to email Todd Shriber
Two of the three major U.S. indexes moved higher on Monday as the S&P 500 gained a mere two points to extend its streak of higher closes to six consecutive days. Helped by expectations of a bullish earnings report from aluminum giant Alcoa (AA), the Dow Jones Industrial Average added almost 46 points to finish the day at 10,663.99. The Nasdaq was the laggard of the group, shedding almost five points to close at 2312.41.

Stats Table

Stocks got a boost from news that China increased exports in December and imports in the world's largest country by population surged to a record, fueling speculation that a global economic recovery is underway. China's customs bureau reported that exports rose nearly 18% in December 2009 compared to the year earlier period, the first increase in 14 months. Imports soared nearly 56%. There is no denying that China's economy is still heavily dependent on exports given that there are only faint signs of a middle class emerging there to turn consumption inward, but the import number may be more significant.

After all, China, perhaps even more so than its emerging market brethren, is also heavily dependent on commodities and raw materials to make keep its burgeoning economy chugging along. Coal, oil, copper and related fare are the types of goods China needs and the equity market seems quite willing to acknowledge that fact.

China Exports

Speaking of stocks acknowledging China's voracious materials demand, check out Caterpillar (CAT), the world's largest maker of construction and mining equipment. The Dow component is a name I mention somewhat regularly in this space, though it has been awhile between appearances. Caterpillar turned in its best day since July on Monday, soaring 6.3% to close at $64.13, just below the new 52-week high of $64.52 that was touched earlier in today's trading session.

Caterpillar helped industrials gain 1.2% as a group, good for the best run among the 10 industry groups tracked by the S&P 500. The move is not all that surprising on a day when positive China news buoys positive investor sentiment because Caterpillar derives a fair chunk of its revenue from international markets and when China needs more goods that are found beneath the earth's surface, the companies that extract those materials are probably going to need more Caterpillar products. That is good news for Caterpillar, whose products do not come cheap. I looked at a Caterpillar dealer Web site and this particular dealer was selling USED track excavators for as much as $60,000, so I assume a new track excavator costs much more.

Caterpillar Chart

Alcoa was another industrial name and Dow member in the news today as the largest U.S. aluminum producer once again kicked off another earnings season by delivering its fourth-quarter results after the market's close. Pennsylvania-based Alcoa reported a smaller fourth-quarter loss of $277 million, or 28 cents a share, compared with $1.19 billion, or $1.49 a share, a year earlier, but sales slumped to $5.43 billion from $5.68 billion. Stripping out a 28-cent per share charge, the company broke-even, but still missed analyst estimates that called for a profit of six cents a share. Alcoa did beat on the top-line as analysts were expecting sales of $4.86 billion.

Alcoa said it sold most of its aluminum for 97.8 cents per pound in the fourth quarter, up eight cents from the third quarter, but a weak dollar hurt results in some of its business units. The stock was up 2.5% on Monday, but all of that gain and more was given back in the after-hours session with Alcoa shares down more than 5% as of this writing.

The decline in after-hours trading could be short-lived because Alcoa Chief Executive Officer Klaus Kleinfeld said on the company's conference call that Alcoa is expecting aluminum demand to rise by 10% in 2010. That number includes expected demand from China, but taking China out of the equation, Alcoa still expects a 5% uptick in demand fueled by orders from other BRIC constituents like Brazil and India.

Alcoa Chart

Another Dow constituent that was active after the market closed was Chevron (CVX), the second-largest U.S. oil company. Chevron said it expects fourth-quarter profits will be lower than those posted in the third quarter when the company earned $1.92 a share. The company cited ''significantly weaker'' refining margins and did not elaborate much beyond that statement. Analysts expect Chevron to earn $1.75 a share for the fourth quarter on revenue of $43.8 billion. The stock touched a new 52-week high of $81.09 before closing at $80.88 in regular trading, but the shares traded as low as $80.15 in after-hours trade. Chevron is scheduled to deliver results on January 29.

On a day that featured plenty of analyst chatter on an array of stocks and sectors some of the more curious commentary did not come from an analyst at all, but from Saudi Prince Alwaleed bin Talal regarding Citigroup, of which Alwaleed is the largest individual shareholder. The king of the writedown, I mean Citi, was up 1.1% after Alwaleed said the worst is behind the third-largest U.S. bank.

Alwaleed has been nothing if not a faithful and long-suffering shareholder of Citi, but there are a couple of things that point to taking his commentary with a grain of salt might be the best course of action. Citi is still a troubled company that trades for less than $5, meaning most institutional investors have to shy away from the shares. Next, the prince recently shifted his $4.3 billion Citi stake from his personal account to his Kingdom Holdings investment account, perhaps indicating he is not as bullish on the shares as his Monday comments indicate. Either way, the prince thinks Citigroup will be profitable in 2010, though he did not say exactly when.

Citi Capital Raises

As I mentioned earlier, the Nasdaq was the lone decliner of the three major U.S. indexes on Monday and the tech-heavy index may get off to a glum start on Tuesday after video game maker Electronic Arts (ERTS) cut its 2010 forecast. The stock was trading down $1.44, or 7.9%, to $16.83 in after-hours trading after closing at $18.27.

For the fiscal year ending in March, Electronic Arts said it expects to earn 40 cents to 55 cents a share, well below previous guidance of 70 cents to $1 a share. Analysts are currently forecasting a profit of 79 cents a share, though that is bound to come down after downgrades are issued in the coming days. Even worse than that dour outlook is the fact that Electronic Arts, maker of the ''Madden'' football franchise among other popular video game franchises, apparently did not perform well during the October-December quarter, which is obviously a critical time of year for video game makers.

For that quarter, the company expects to miss profit and revenue estimates and will repeat that dubious trick for the full fiscal year. This is the same company that lowered its headcount by 17% in November to pare costs, so today's news is probably even more disappointing to investors. One analyst said the company is not performing well and management cannot seem to explain why. That is not an encouraging assessment to say the least.

Electronic Arts Chart

Fortunately, Monday is just one day, and Alcoa's outlook is what may perk investor interest in that stock, but the Nasdaq may be off to an ominous start to earnings season. Then again, one of the index's most important constituents, Intel (INTC), reports results on Thursday after the close. To say that Intel's earnings announcement is the marquee market event this week may be somewhat of an understatement when considering that the Nasdaq was easily the best performing of the three major indexes in 2009.

Many investors may be speculating that the fate of the tech sector for this earnings season hinges on Intel's results and outlook. Intel unveiled some new processors at the the Consumer Electronics Show in Las Vegas last week, but the real story here is going to be the ability of the world's largest chipmaker to do what it has done the previous two quarters and that is blow away Street estimates and help stoke the flames of another tech rally.

Analysts are forecasting a profit of 30 cents a share on revenue of $10.16 billion. If those numbers are soundly beaten and Intel offers a rosy outlook for 2010, the stock will likely pop on Friday.

Intel Chart

Looking at the charts, the Dow is inching closer to resistance at 10,700. Noteworthy is the fact that this is resistance from 2006 and the catalysts are there for the Dow to make some headway. That also means there might be some ammunition for the bears as well. Tuesday's trade could be telling as traders and investors absorb the Alcoa and Chevron news. Remember that the Dow is a price-weighted index, meaning the higher a stock's price, the bigger its weight in the index. That is a long way of saying Chevron matters more than Alcoa.

Regardless of what happens tomorrow, 10,500 still looks like the first support area. Friday should be another important day for the Dow with Intel's results coming after the bell on Thursday and JPMorgan Chase (JPM) updating investors on Friday morning. JPMorgan could be a tone-setter for the banking sector and if the second-largest U.S. bank disappoints, the end result is not going to be pretty for the banking group. A reasonably positive outlook for 2010 and an update regarding a higher dividend would be positive catalysts for JPM.

Dow Chart

The S&P 500 has a lot of real estate in front of it before it bumps into its next resistance area at 1200 and support seems firm at 1115, but are there cracks in the bullish armor? I read a few anecdotes this weekend that I thought were interesting. One said that 85% of the S&P 500 is trading above their 50-day moving averages. Take a look at the recent Investors Intelligence surveys and you will find that bulls out number bears by nearly three to one and the average investor has increased his/her stock market exposure to 64%, the highest level since October 2007.

S&P 500 Chart

The worst day the Nasdaq sees this week may be Tuesday as investors react to the Electronic Arts news, but we are not talking about Amazon (AMZN) or Apple (AAPL) here, and with expectations high for Intel's report later this week, the damage done by EA is likely to be well-contained and not enough to drag the Nasdaq to support at 2250. The focus is on Intel and if the report is good, the index could make up some of the ground between today's close and the important 2350 level.

Nasdaq Chart

With another earnings season about to begin in earnest, reports from Intel and JPMorgan will probably be the determining factors in how stocks finish the week. Beyond that, earnings quality and 2010 guidance should be what investors are looking at in the coming weeks. The second quarter saw plenty of companies beating profit estimates due to lower costs. A few of them went back to that well in the third quarter, but that trick's expiration date has passed. Now, it is all about the 2010 outlook and higher top-line guidance.

New Option Plays

A Rebound in REITs?

by James Brown

Click here to email James Brown


AvalonBay Commty. - AVB - close: 80.48 change: +1.09 stop: 77.90

Why We Like It:
Avalon Bay Communities is a REIT stock. The sector saw huge gains in early December only to reverse lower after Christmas. Now after a two-week correction this stock is bouncing from support. Some positive analyst comments this morning about the future of REITs certainly didn't hurt. I want to see more confirmation. Use a trigger at $82.05 to buy calls. If triggered our first target is $87.50. We will plan to exit ahead of the early February earnings report.

Suggested Options:
I'm suggesting the February calls. My preference is the $85 strike.

BUY CALL FEB 85.00 AVB-BQ open interest=247  current ask $1.85

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 82.05
Change since picked:       + 0.00
Earnings Date            02/03/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on   January 09, 2010         

In Play Updates and Reviews

Shares of CAT, FDX, and UPS break higher.

by James Brown

Click here to email James Brown

CALL Play Updates

Caterpillar - CAT - close: 64.13 change: +3.79 stop: 59.45 *new*

Don't we wish all of our plays moved this fast. Shares of CAT gapped open higher at $60.95 and closed with a 6.28% gain on big volume. The Wall Street Journal is suggesting that positive comments and optimism by CAT's dealers is what sparked the move this morning. I am suggesting we go ahead and take profits now! We were aiming for $64.75 but this one day move is more than enough. Let's sell half our position now. The February $60 calls gapped open at $2.80 and hit $5.44 intraday. The February $62.50 calls gapped open at $1.80 and hit $3.75 intraday. The two options closed with at $5.20(bid) and $3.55(bid), respectively.

I'm not suggesting new positions. We'll raise our final exit target to $67.00. Our time frame is short. Earnings are about two weeks away and we want to exit before CAT reports. Please note our new stop loss at $59.45.


Entry  on   January 09 at $ 60.95 /gap higher entry (small positions)     
Change since picked: + 3.18
/take profits early $ 64.13 (+5.2%) Earnings Date 01/26/10 (confirmed)
Average Daily Volume = 4.8 million
Listed on January 09, 2010

Express Scripts - ESRX - close: 90.23 change: -1.42 stop: 87.45

It looks like we're getting our dip toward $90 a bit sooner than expected. I'm suggesting readers use this pull back as a new entry point to buy calls. Our first target is $95.75. Our second target is $99.75. We do not want to hold over the February earnings report.

Entry  on   January 09 at $ 91.65 (small positions)     
Change since picked: - 1.42
Earnings Date 02/24/10 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on January 09, 2010

FUQI Intl. - FUQI - close: 21.67 change: +0.01 stop: 18.99

FUQI spiked to a new five-week high at $22.45 this morning. Shares gave back all of its intraday gains to close virtually unchanged on the session. This looks like a short-term top and we should expect a dip from here. Broken resistance near $20 and its 50-dma should be new support. I am not suggesting new call positions at this time. This was a very aggressive trade and I suggested very small positions. Our target to exit is $24.75 but more conservative traders may want to start taking profits early anywhere above $22.50.

Entry  on   January 06 at $ 20.51   (small positions 1/4)  
Change since picked: + 1.16
Earnings Date 03/31/10 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on January 04, 2010

J.P.Morgan Chase - JPM - close: 44.53 change: -0.15 stop: 41.90

The banking sector continued to march higher but shares of JPM gave up its early gains to close with a fractional loss. This is the second time in the last three trading days that JPM stalled just above $45.00. I suspect shares are poised to correct. If you haven't taken profits yet do so now. I would look for a dip toward the $42.50-42.00 zone. Our second and final target is $46.90.

Entry  on   January 04 at $ 42.85 (small positions 1/2)      
Change since picked: + 1.68
take profits on 01/09/10 @ 44.68 (+4.2%) Earnings Date 01/15/10 (confirmed)
Average Daily Volume = 31.6 million
Listed on January 04, 2010

L-3 Communications - LLL - close: 88.64 change: +0.89 stop: 86.90

I was about ready to give up on LLL. The stock broke out higher from its recent sideways consolidation. Traders even bought the dip midday near $88.00, which was recent resistance. This actually looks like an aggressive, higher-risk entry point.

I did label this an aggressive, higher-risk trade. Our first target to take profits is at $89.95. Our second and final target is $94.00. We want to exit ahead of the late January earnings report. FYI: The Point & Figure chart is bullish with a $104 target.

Entry  on  December 28 at $ 86.80       
Change since picked: + 1.84
Earnings Date 01/28/10 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on December 26, 2009

Precision Castparts - PCP - close: 116.28 change: -0.98 stop: 112.25

PCP gapped open higher this morning and almost hit our final target. Shares opened at $118.62 and our final target is $118.75. Traders did buy the dip intraday near $115. More conservative traders may want to go ahead and exit early. I'm not suggesting new positions. More aggressive traders could aim higher. We'll keep our final exit at $118.75.

Picked on  December 01 at $107.35      
Change since picked: + 8.93
/1st target hit $112.45 (+4.7%)
Earnings Date 01/20/10 (unconfirmed)
Average Daily Volume = 817 thousand
Listed on November 28, 2009

TORO Co. - TTC - close: 43.77 change: +0.61 stop: 41.40

TTC continues to rally and shares are trading near short-term resistance at their December highs near $44. I don't see any changes from our weekend comments. Our exit target is $45.90. We don't want to hold over the February earnings report. The plan calls for small positions to limit our risk.

Entry  on   January 07 at $ 42.60 (small positions)      
Change since picked: + 1.17
Earnings Date 02/18/10 (unconfirmed)
Average Daily Volume = 289 thousand
Listed on January 05, 2010

UnitedHealth Group - UNH - close: 32.92 change: +0.22 stop: 29.90

The HMO healthcare index drifted lower on Monday. UNH bucked the trend and managed a 0.6% gain. I'm not suggesting new positions at these levels. You could buy calls on a dip near $32.00 but use a very tight stop loss.

This was a "lottery ticket" style of play. We knew it was risky given all the political ups and downs for the healthcare bill. Our time frame was several weeks and we listed January and March calls. At this time if you choose to open new positions I'd use March calls but that would require holding over the late January earnings report (to get the most out of your March calls). Our first target is $34.00. Our longer-term target is $36.00.

Entry  on  December 10 at $ 30.31       
Change since picked: + 2.61
Earnings Date 01/21/10 (unconfirmed)
Average Daily Volume = 819 thousand
Listed on December 10, 2009

Whirlpool - WHR - close: 84.02 change: -0.54 stop: 79.90

WHR consolidated sideways after yesterday's big gain. Look for short-term support near $82.00. I'm not suggesting new positions at this time. Look for a dip back toward $82.00 as a possible entry point. If you open positions going forward I would use the February calls. Our original play suggested January calls so we'll need to exit before expiration.

WHR has already hit our first target at $84.75. Our second target is $89.00.

Entry  on  December 19 at $ 80.76 /gap higher entry      
Change since picked: + 3.26
/1st target hit $84.75 (+4.9%)
Earnings Date 02/08/10 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on December 19, 2009

PUT Play Updates

Sears Holding - SHLD - close: 99.44 change: +0.27 stop: 102.05

The RLX retail index displayed relative weakness but shares of SHLD managed a small 0.2% gain. The stock is still struggling with resistance near $100. I don't see any changes from our weekend play description. I'd still consider new positions here.

I'm suggesting small bearish positions with a stop loss above last week's high. Our first target to exit is $95.25. Our second target to exit is $91.00.

Entry  on   January 09 at $ 99.17 (small positions)
Change since picked:       + 0.00
Earnings Date            02/25/10 (unconfirmed)
Average Daily Volume =        2.0 million  
Listed on   January 09, 2010         


Intl. Business Mach. - IBM - close: 129.85 change: -1.37 stop: 128.90

IBM displayed relative weakness. The stock erased Friday's bounce. Shares actually spiked under the $129.00 level and hit our stop loss (128.90) to close our trade. The move today looks like a short-term bearish reversal. If you didn't get stopped out I'd consider an early exit.


Entry  on  December 28 at $131.55      
Change since picked: - 2.65 <-- stopped @ 128.90 (-2.0%)
Earnings Date 01/19/10 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on December 26, 2009


Fedex Corp. - FDX - close: 87.25 change: +2.26 stop: 85.51

The transportation sector was one of the better performers today. Today's rally in this group helped confirm last Friday's bullish breakout. Shares of FDX, which had been lagging its peers, finally broke out through the top of its trading range. I've been suggesting that nimble traders could buy calls on a breakout over $86 or $88 and FDX rallied past both levels intraday.

I'm dropping FDX as a bearish candidate as the stock never hit our trigger to buy puts at $81.90.


Entry  on   January xx at $ xx.xx <-- TRIGGER @ 81.90      
Change since picked: + 0.00 *NEVER OPENED*
Earnings Date 03/18/10 (unconfirmed)
Average Daily Volume = 3.3 million
Listed on January 02, 2010


United Parcel Service - UPS - close: 62.82 change: +2.65 stop: n/a

After weeks and weeks and weeks of going nowhere UPS is finally moving. The rally from last Friday continued. Shares of UPS gapped open higher and closed the session with a 4.4% gain and a new 52-week high. Over the weekend I turned cautious on our strangle play since we were down to our last five days and suggested we exit if either option in our strangle hit $1.35, which is breakeven. Well, the trading gods have smiled upon us and the January $60 calls opened at $1.49 closing our play above our adjusted target. Of course it was painful to see those same calls spike to $3.40 intraday. Our original target was actually $3.50 or higher.

Our strangle trade is closed. The options suggested for the January strangle were the January $60.00 calls (UPS-AL) and the January $55.00 puts (UPS-MK). Our estimated cost was $1.35.


Picked on  November 21 at $ 57.99 /gap open entry      
Change since picked: + 4.83
Earnings Date 02/02/10 (unconfirmed)
Average Daily Volume = 4.7 million
Listed on November 21, 2009